INCOME TAX ACT, 1961

Income deemed to accrue or arise in India-Under section 9(1)(vii)(b)-Teritority of India

Assessee had challenged an order of ITO which decided that the assessee was liable to withhold a certain portion of monies being paid to a foreign company, under either one of section 9(1)(i) or 9(1)(vii)(b). Assessee had also challenged the vires of section 9(1)(vii)(b) for want of legislative competence and violation of Article 14 of the Constitution. The High Court was upheld that section 9(1)(i) did not apply in the circumstances of the facts of the case, nevertheless upheld the applicability of section 9(1)(vii)(b) on the facts and also upheld the constitutional validity of the said provision. Appeal was withdrawn. After conclusively determining that Clauses (1) and (2) of Article 245, read together, impose a requirement that the laws made by the Parliament should bear a nexus with India, the three judge bench in ECIL asked that a constitutional bench be constituted to consider whether the ingredients of the impugned provision, i.e., section 9(1)(vii) indicated such a nexus. In the proceedings, the assessee withdrew its challenge of the constitutional validity of section 9(1)(vii)(b), and elected to proceed only on the factual matrix as to the applicability of the said section. Nevertheless, ITO pressed upon this Constitutional Bench to reconsider the decision of the three judge Bench in the ECIL case. In light of the constitutional importance of the issues we agreed to consider the validity of the requirement of a relationship to or nexus with the territory of India as a limitation on the powers of the Parliament to enact laws pursuant to Clause (1) of Article 245 of the Constitution. Further clarification needs to be made before we proceed. The issue of whether laws that deal entirely with aspects or causes that occur, arise or exist, or may be expected to do so, within India, and yet require to be operated outside the territory of India could be invalidated on the grounds of such extra-territorial operation is not before us. The text of Clause (2) of Article 245, when read together with Clause (1) of Article 245 makes it sufficiently clear that the laws made by the Parliament relating to aspects or causes that occur, arise or exist or may be expected to occur, arise or come into existence within the territory of India may not be invalidated on the ground that such laws require to be operated outside the territory of India. We will of course deal with this aspect to the extent that it is required for a proper appreciation of Clause (1) of Article 245, and to the extent the permissibility of such extra-territorial operation has been sought to be, by the learned Attorney General, extrapolated into a power to make any extra-territorial laws. Held: Arguments were made claiming supremacy or sovereignty for various organs to act in a manner that is essentially unchecked and uncontrolled. Such claims were made with regard to foreign affairs, both within and outside the territory, in which the Government claims the existence of serious security risks or law and order problems. Indeed, it might be necessary for the State to possess some extraordinary powers, and exert considerable force to tackle such situations. Nevertheless, all such powers, competence and extent of force have to be locatable, either explicitly or implicitly, within the Constitution and exercised within the four corners of the constitutional permissibility, values and scheme. [Para 68]

In granting to the Parliament the powers to legislate for India and, consequently, also with respect to extra-territorial aspects or causes, the framers of our Constitution certainly intended that there be limits as to the manner in which, and the extent to which, the organs of the State, including the Parliament, may take cognizance of the extra-territorial aspects or causes, and exert the State powers (which are the powers of the collective) on such aspects or causes. Obviously, some of those limits were expected to work at the level of ideas and of morals, which can be inculcated by a proper appreciation of our own history, and the ideas of the framers of our Constitution. They were also intended to have a legal effect. For the working of the principles of public trust, the requirement that all legislation by the Parliament with respect to extra-territorial aspects or causes be imbued with the purpose of protecting the interests of, the welfare of and the security of India, along with article 51, a Directive Principle of State Policy, though not enforceable in a Court of law, nevertheless fundamental to governance, lends unambiguous support to the conclusion that the Parliament may not enact laws with respect to extra-territorial aspects or causes, wherein such aspects or causes have no nexus whatsoever with India. [Para 73]